Yamana Gold makes headway in Mexico, Brazil

It was just four months ago that Yamana Gold (YRI-T, AUY-n, YAU-l) was trading in Toronto at the very bottom of its 52-week price range of $4.29-$19.79 per share.

Today the mid-tier gold producer with land positions in Brazil, Argentina, Chile, Mexico and Central America, is trading back up in the double digits at $11.68 per share. 

And if the gold price continues to climb as safe-haven buyers react to the worsening financial crisis, Yamana Gold’s stock may move higher. Gold futures hit the $1,000 mark for the first time in nearly a year on Feb. 19.

But the Canadian gold producer’s share price gains in recent months may have as much to do with the headway it’s making in countries like Brazil and Mexico.

In mid-February Yamana published the results of a prefeasibility study on its Mercedes project in northern Sonora, Mexico, about 200 km south of Tucson, Arizona, and a scoping study for its Ernesto/Pau-a-Pique projects near Pontes e Lacerda in Brazil’s southwestern Mato Grosso state, near the Bolivian border.

Yamana expects to complete a feasibility study and make a construction decision on Mercedes by the end of the first quarter of 2010.

Yamana has drilled a total of 140,000 metres of exploration and infill drilling at Mercedes, a complex gold-silver hydrothermal low-sulphidation vein/stockwork system.

The deposit has probable reserves of 2.6 million tonnes grading 7.10 grams gold per tonne and 72.4 grams silver per tonne, for total contained gold of 604,402 ounces.

According to a recent prefeasibility study, Yamana expects throughput of 1,500 tonnes per day, which would mean production of about 118,000 gold equivalent ounces for about six years based on known reserves. (Gold equivalent ounce calculations were based on an assumed gold to silver ratio of 55:1, which Yamana says is “a longer-term historical average.”)

Cash costs were estimated at $264 per gold equivalent ounce, with gold recoveries expected of about 95% and silver recoveries of 30%.

Total capital costs are forecast to be in the range of $152 million.

Using a gold price of $814 per ounce and a silver price of $13 per ounce, the prefeasibility study indicates that, at a 5% discount rate, Mercedes’ after-tax net present value (NPV) would be about $72.7 million, and its after-tax internal rate of return (IRR) would be in the order of 22.4%.

Yamana plans to drill about 30,000 metres at Mercedes this year.

If it decides to proceed with a mine, construction is forecast to take about two years. And if it is given the green light by the end of the first quarter of 2010, the mine could be in production as early as 2012.

Yamana’s objective is to increase total recoverable gold equivalent ounces to at least 1 million before a construction decision is made.

Moving south to Brazil, Yamana expects to have a feasibility study completed and a construction decision made on its Ernesto/Pau-a-Pique by the end of this year.

The Ernesto deposit is about 60 km south of Yamana’s Sao Francisco mine and the Pau-a-Pique deposit is about 56 km south of Ernesto. A common plant is envisioned for the two mines.

The deposits are hosted by meta-sedimentary rocks of Proterozoic age. Gold mineralization is hosted by quartz veins in the metasedimentary rocks or associated with shear zones at the contact of the metasediments with the underlying granite basement.

So far the company has drilled a total of 50,000 metres and plans additional exploration this year.

The Ernesto/Pau-a-Pique mineral resource estimate, based on cut-off grades of 1 gram gold per tonne for the open pit and 1.5 grams gold per tonne for an underground operation, includes an indicated resource of 3.95 million tonnes grading 4.67 grams gold per tonne for a total of 593,000 oz. of contained gold. In addition the deposit has an inferred resource of 3.14 million tonnes grading 3.02 grams gold per tonne, for 305,000 oz. contained gold.

Yamana believes that construction will likely begin in 2010 and anticipates Ernesto/Pau-a-Pique will be in production in 2012.

Using a gold price of $825 per ounce, a scoping study concluded that at a 5% discount rate, the after-tax NPV would be about $138 million and after-tax IRR would be 38%.

Total capital costs are expected to reach about $86 million through 2010 and 2011.

Aannual production is expected to be roughly 100,000 ounces of gold with an average cash cost of about $356 per ounce.

In addition to Ernesto/Pau-a-Pique in Brazil, Yamana is involved in a development stage project called Pilar in the country’s Goias state.

Yamana expects to complete an initial feasibility study on Pilar in the first half of 2009 and says it hopes to make a construction decision by the end of the first quarter of 2010.

In 2008 the company invested roughly $6.1 million in Pilar, drilling about 23,000 metres. The result: An inferred mineral resource estimate of 12.4 million tonnes grading 2.42 grams gold per tonne for contained gold of about 970,000 ounces.

Yamana believes that Pilar likely will be developed as an open pit and underground operation and plans to drill an additional 20,000 metres this year.

A resource update is expected in the second quarter of this year, which will include the drilling information completed in 2008.